Posted by: Nanette Byrnes on February 18, 2010
Yesterday the Pew Center on the States painted a dismal picture of the pension and retiree healthcare programs operated for State workers. This is bad news for everyone, because as the center’s managing director Susan K. Urahn noted yesterday, these promises will have to be met. That may very well require cuts in other services or higher taxes for all.
As shocking as Pew’s $1 trillion tally of the shortfall is, it may actually be sharply understated. The main reason for that is the quickly rising, and nearly completely unfunded, retiree health care bill.
States have a mixed record of funding their pension promises with states like Illinois regularly skipping payments and now holding just over 50% of what it needs to pay out while others, including New York, have been conscientious about their payments. But in healthcare the record’s much more uniform, and much worse. No one’s put much aside at all, and twenty states have zero saved. Instead they “pay-as-you-go” and each year pay more as health care inflation rises.
The result: more than half of the $1 trillion comes from retiree healthcare.
Even that maybe understating the medical costs. A GAO report published in 2008 cited studies that put the figure at somewhere between $600 billion and $1.6 trillion
Governments may be short changing this healthcare promise because of an impression that pension obligations are more certain, that healthcare could have some wiggle room, says Richard Raphael a group managing director at debt rating firm Fitch. “The pension is a more locked in kind of liability than retiree healthcare where there tends to be more flexibility,” he says.
Retiree healthcare promises “were unfunded. They’re still unfunded. and they’re Not likely to get funded in this time,” says Alicia Munnell, the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management and Director of the Center for Retirement Research at Boston College.
The problem for the elected leaders looking to test that flexibility is that what tax payers won’t cover, retirees must take on themselves. So after decades of working for often modest wages, an elderly retired school teacher or court clerk will find that benefit they’d expected to rely on in old age is suddenly gone.
In West Virginia, a state with chronic pension shortfalls and a &7.8 billion unfunded healthcare promise, legislators have made fixing this hole a top priority in the last year.
They have agreed to put some money toward the debt, but most of the savings will come from benefit cuts. In a press release announcing a special panel’s recommendations, State Senate President Earl Ray Tomblin said “We need to get a jump on it and on it now, before the liability becomes so large that it literally consumes all our future economic growth.”
West Virginia state retirees began paying more of their health insurance several years ago, a minimum hike of $750 a year says Ernest Terry, a state retiree from Nitro, West Virginia who’s been fighting to retain benefits. West Virginia is a notoriously low paying state, Terry says, now his former colleagues are taking jobs at the local 7-11 and Wal-Mart to make ends meet.
“We’re under a lot of stress,” he says. “One of my tag lines when I’m speaking to the legislature, I tell them, what I would like is for my fellow retirees to be able to eat at McDonalds. Not work there.”
Sharp tax revenue declines and budget problems mean more states will be facing the questions West Virginia already is grappling with. “It’s when you get to times like this when you start having to make some of the tough choices, cutting back services, cutting back staff, raising taxes. All of those are very tough choices,” says Edith Behr, a senior credit officer for Moody’s.
How can you manage smarter? BusinessWeek writers Nanette Byrnes, Patricia O’Connell, Emily Thornton, Matthew Boyle, Michelle Conlin and Diane Brady synthesize insights from the brightest business thinkers, critique the latest management trends, and comment on leaders in the news.